Budget 2011: Govt likely to increase excise duty by 2%, as well as raise service tax

February, 22nd 2011

The government is likely to increase excise duty by 2 per cent in sectors like FMCG and automobiles, as well as raise service tax, in the forthcoming Budget to reduce the fiscal deficit, a report said.

SMC Global Securities Ltd, in its forecast for the 2010-11 Budget, said that service tax is expected to be hiked to 12 per cent from the current level of 10 per cent.

In bad news for exporters, it said the Finance Minister is unlikely to extend the interest subsidy of 2 per cent, as the country's exports are likely to cross the $200 billion target for the current fiscal.

In the last Budget, the government had extended the concessional export finance regime till March 31.

"In order to contain fiscal deficit, Pranab Mukherjee will stress on revenue generation by expanding the excise tax base by another 2 per cent in sector such as automobile, cement, FMCG, power and telecom, besides increasing service tax," SMC Group Managing Director Subhash Aggarwal said.

India's fiscal deficit had ballooned to 6.8 per cent of the GDP in 2009-10 and is pegged quite high at 5.5 per cent for the current fiscal.

Aggarwal said the minister may widen the service tax basket and include education and healthcare in the Budget. "... India is likely to resort to pre-crisis fiscal and monetary policies from April, 2011, onward, focusing on revenue mobilisation," it said.

The report also said the government may increase spending in agriculture, infrastructure and education.

In a bid to support agriculture growth, the finance minister could raise credit target for banks to Rs 450,000 crore. In the last Budget, the target was raised to Rs 37,500 crore.

The minister may allocate Rs 40,000 crore to the Mahatma Gandhi NREGA, it said.

Furthermore, the pre-Budget analysis said that Mukherjee is likely to cap the combined debt of the Centre and states close to 65 per cent of national GDP.

On disinvestment, the report states that the government is likely to fall short of capital proceeds from its disinvestment target of Rs 40,000 crore in current fiscal.

In 2011-12, it is expected that the government would be able to generate between Rs 35,000 to Rs 40,000 crore through divestment in companies like IOCL, BHEL and MMTC Ltd , it said.

The report says that deregulation in diesel will take place only after inflation cools off to level of 5 to 6 per cent, as a diesel price hike always has major ramifications on the economy.